The Social Security System has been a large and visible part of the
American financial system since the 1930s. When President Franklin Roosevelt
signed the law, it was designed to be a financial security net for older
Americans. The system was set up with workers paying into it and
beneficiaries getting retirement and other benefits. Since then, the
demographic base of the country has changed, the system has grown and become
a visible and controversial topic. With the current government surplus,
maintaining the financial integrity of the system has become an important
political issue.

In 2004, it is estimated that the system paid out over $523 billion to over
52 million people. One half of those payments were to retired individuals
with the rest going to disabled individuals, to cover medical costs and to
the families of retired, disabled or deceased Americans.

Current issues
The controversy over the financial soundness of the system comes from the
aging American population. Since the system is a pay as you go system, the
contributions of current workers are used to pay current benefits to those
already retired as well as accumulated for the benefit of those working. The
difficulty comes from the reduction in the number of contributors for each
person receiving benefits. Currently, there are only 3.3 contributors for
each recipient and there will be only 2.1 contributing for each recipient in
2030.

Ultimately, to fund the retirements for today's workers, either
contributions must increase, benefits must decrease, the earnings on
accumulations must increase or additional money must come into the system.
The big debate raging currently is whether and how the current surplus being
generated by income taxes should be used for this purpose. There are also
proposals that would enable individuals to have more control over how
portions of their funds would be invested.

Here is some information that will help you understand how the system
works.

Average monthly benefits for 2005.

Retired workers $955

Retired couples $1,574

Young widow with 2 eligible children $1,979

Aged widow with no children $920

Contribution rates
The system receives income from employees as well as employers. Over the
years the tax rate has increased as well as the earnings base subject to the
tax. Currently, the rates are:

For workers

Social Security tax of 6.20% on the first $90,000 of
wages. Medicare tax of 1.45% on all wages.

For employers

Social Security tax of 6.20% on the first $90,000 of
wages. Medicare tax of 1.45% on all wages.

For the self employed

Social Security tax of 12.40% on the first $90,000 of
wages. Medicare tax of 2.90% on all wages.

Here is a chart showing what you, as an employee would pay at different
levels of wages.

Wage level

Social Security (6.20%)

Medicare (1.45%)

Total

$25,000

$1550

$362

$1912

$40,000

$2480

$580

$3060

$80,000

$4960

$1160

$6120

$100,000

$5580*

$1450

$7030

*Only income up to $90,000 is subject to Social
Security taxes while all income is subject to the Medicare tax.

Here is another chart showing what a self-employed individual would
pay.

Wage level

Social Security (12.40%)

Medicare (2.90%)

Total

$25,000

$3100

$724

$3824

$40,000

$4960

$1160

$6120

$80,000

$9920

$2320

$12,240

$100,000

$11,160*

$2900

$14,060

*Only income up to $90,000 is subject to Social
Security taxes while all income is subject to the Medicare tax.

Taxation of Benefits
Since the middle 1980s, some portion of Social Security benefits has been
subject to income tax. This taxation is based on the overall level of income
the individual has. The rules are somewhat complex, but generally speaking,
if you are married and file a joint federal income tax return and your
adjusted gross income for 2004 is above $32,000, one half of your retirement
benefits are subject to tax. As your income rises, increasing portions of
your benefits are taxed. The portion subject to tax increases to 85% if a
married couple filing a joint tax return has income above $44,000. Consult
your tax advisor to learn how this may apply to you.

How should you look at Social Security?

First, you must recognize that Social Security retirement benefits will
probably not be large enough to fund all of your retirement expenses.

Second, you should make sure your Social Security records are accurate.
The government has started a program of providing everyone with an annual
statement that shows your income and contribution history and provides an
estimate of retirement benefits. This report is called a Personal Earnings
and Benefits Estimate Statement. You can also request this report by getting
a form from a Social Security office.
Finally, you should make sure that as you review your financial plans for
retirement, you are realistic in estimated how much of your needed income
Social Security will provide.